Alexander Mizan's  Instablog

So I am writing this for all of us real estate investors out there that either bought a property or are looking to jump into a home, all of us there that are into foreclosures and bank REOs either for investment purposes or becuase they are looking to buy the home of their dreams and finally all of us out there that have been waiting for the real estate market to collapse and are trying to see whether the 30%-plus decline in home prices in Southern California, Nevada, Arizona and Florida represents the bottom or not. I am also writing to those of us who hold some core positions in the stock market and want to know when it's time to rotate back into banking and homebuilder stocks. For those of us who want to know if this is the bottom or if this is a head fake for real estate.

So how do we know if we have reached the bottom in the real estate market? We can listen to the news, look at statistics etc but by the time the news makes it to the headlines, we are already past the bottom and we are off to the races. By the time the economists tell us that we have reached the bottom, it'll probably be too late. We need some simple tools to see for ourselves before everyone else.

A good quick tool would be to gauge the depth of REO inventory on the banks' books. REO, for those not familiar with the jargon, stands for Real Estate Owned, which means properties that are owned by the banks. What happened to those properties is that they were foreclosed, they went on the auction block and nobody bid high enough to buy them at the auction. The bank then exercised their right to buy back the property as the auction's highest bidder and now they are owned by the bank. But the banks are not in the business of owning real estate and they are trying to sell this inventory. As the REO inventory increases, the supply of REO (or you can say foreclosed) homes increases, which signifies no bottom anytime soon in the real estate market. Once you see the inventory decreasing, then maybe we are near the bottom.